Reserve Bank governor casts deciding vote on repo rate

JOHANNESBURG – South Africa’s rand headed to the long weekend on a firmer footing supported by both the US Federal Reserve Bank and the SA Reserve Bank (Sarb) decision to keep their benchmark repo rates steady this week which halted the decline in the faltering local unit.

The Reserve Bank sprang a surprise on many on Thursday by keeping rates unchanged. However, the bank’s monetary policy committee (MPC) was split down the middle with three voting for a cut and three voting for no cut.

The deciding vote went to the governor, Lesetja Kganyago, who nailed his colours to the mast. Allet Opperman, an analyst at TreasuryOne, on Friday said that should the cycle be for rates cuts, Thursday was probably the opportune time to cut with the event risk being fairly low compared to when the MPC sits down again at the end of November.

The justification provided by the central bank suggests that it was economic uncertainties coupled with the unknown electricity price increase which tilted an evenly split MPC to tilt cautiously. “The rand received a reprieve from the MPC yesterday (Thursday) and is comfortably trading in the mid R13.20s with some downside bias.

“After a week of losing ground, we feel that today might be a day of consolidation and we could see the rand testing the high R13.10s again,” Opperman said. The strength of the rand on Friday was also supported by the weakening the US dollar which buckled as tensions simmered on the Korean peninsula.

The local unit reversed losses of the last week-and-a-half caused by a report showing stronger US inflation, which pushed it as low as R13.35, its softest since August 15 and strengthened to R13.19 against the dollar. Adding to investors’ risk-aversion was Standard and Poor’s Global Ratings’ downgrade of China’s sovereign credit rating. On Friday, the ratings agency said the country’s attempts to reduce risks from its rapid build-up in debt are not working as quickly as expected and credit growth is still too fast.

Analysts from Investec, said in a note on Friday, that in the end, the Sarb stood cautiously and had extended the period of positive carry that will assist in supporting the rand.

“The local unit responded positively to the news and technically, the rand now stands in a position to stage a recovery with uncertain candlestick patterns now followed by a bearish engulfing pattern which undoubtedly points to a turn of the tide back in the rand’s favour,” Investec said.

The US Fed’s open markets committee did not alter rates at its meeting on Wednesday while announcing plans to begin paring its balance sheet from next month. It also indicated that one more rate increase by the end of the year remains possible.

David O’Donnell, a senior foreign exchange dealer at Merchant West, on Friday said that the market is unwinding an overly pessimistic view on US rates, which is the reason that the dollar has bottomed, overall,

“Many investors had expected the Fed to strike a more dovish tone in light of the potential economic impact of recent hurricanes and the persistence of sluggish inflation,” O’Donnell said.